## Facts

- A tramways company was authorized by statute to use steam or mechanical power only with consent from the Board of Trade.
- The company’s directors issued a prospectus stating that the company had the right to use steam or mechanical power instead of horses and would obtain savings.
- The prospectus did not disclose that the use of steam or mechanical power depended on Board of Trade consent.
- The directors believed consent would be granted and treated it as a formality.
- Shareholders purchased shares relying on the prospectus.
- The Board of Trade later refused consent for certain tramways; the company could not operate as expected and was wound up.
- The shareholders sued the directors in deceit, alleging a fraudulent misrepresentation in the prospectus.

## Issues

1. Whether directors are liable in deceit for a false prospectus statement that they honestly believed to be true but for which they lacked reasonable grounds.
2. Whether absence of reasonable grounds, without proof of dishonesty or recklessness, is sufficient to establish “fraud” in an action of deceit.

## Decision

- The House of Lords allowed the directors’ appeal and restored the trial judgment dismissing the action.
- Deceit requires proof of actual fraud; an honest misstatement, even if careless or unsupported by reasonable grounds, is not enough.
- The shareholders failed to prove that the directors knew the statement was false, lacked belief in its truth, or were reckless as to its truth.

## Legal Principles

- In deceit, the plaintiff must prove actual fraud; nothing less suffices.
- Fraud is shown where a false representation is made: (1) knowingly, (2) without belief in its truth, or (3) recklessly, not caring whether it is true or false.
- Honest belief in the truth of the statement defeats a claim in deceit, even if the belief rests on insufficient grounds.
- Lack of reasonable grounds may be evidence from which a court can infer absence of honest belief, but it is not, by itself, fraud.

## Conclusion

The House of Lords held that liability in deceit is confined to fraudulent misrepresentation proved by knowing falsity, lack of belief, or recklessness; directors who honestly believed their prospectus statement were not liable merely because the statement was false and unsupported by reasonable grounds.


Derry v. Peek, 14 App. Cas. 337 (H.L. 1889)